What’s a Fair Distribution of Wealth?

What’s a Fair Distribution of Wealth?

Delusional Democracy Breeds Delusional Prosperity

Economic justice would naturally lead to less economic inequality. But meanwhile, why does the U.S. inequality profile look so much like that of a third-world dictatorship? Joel S. Hirschhorn offers some details.

by Joel S. Hirschhorn

Contrary to popular thinking, many revolutions have not occurred because of a widespread desire for freedom or democracy. They have been driven by mass hatred and rejection of economic inequality. The poor have revolted against the rich for eons. For much of human history the lack of freedom was linked to economic inequality. Those in power limited personal freedom so they could control the economy and prevent a fair distribution of wealth, allowing a relatively few to amass riches. Things change. If there is a special American capitalist genius it is maintaining a system with considerable freedom but where economic inequality is staggering. Our freedom subverts the need to revolt against the economy.

The unwritten theory seems to be that if citizens have personal freedom they will ignore economic inequality. And it seems to be working well here in the United States of Affluence. Aristocratic power-economic elites that really run the country have done more than shred the structure of our democracy under both Republican and Democratic regimes. They have engineered an economic system that is destroying the vaulted middle class, creating a simpler two-class system: the wealthy and the working poor. Americans are kept in a distractive state of consumer borrowing and spending. They never use their consumer power to challenge the system. They are continually fed economic lies. They are mostly blind to their delusional democracy and its flip side  delusional prosperity.

A new report from the Center for Economic and Policy Research: Is the U.S. a Good Model for Reducing Social Exclusion in Europe? by John Schmitt and Ben Zipperer is just the latest in a long march of largely ignored studies that reveal what the establishment does not want Americans to know.

What should be the talk of the town throughout the nation is rising economic inequality. Every time you hear some news report and statistic about how well the American economy is doing stop and ask yourself: But whats the story on economic inequality? Is economic prosperity being shared? Is wealth disproportionately flowing to the wealthy, not just here but also increasingly exported to foreign super-rich?

This new report presents powerful data on net disposable household income inequality. Data on the Gini coefficient is the most common measure of income inequality. This coefficient varies from zero  perfect equality  to one  just one household having all the income. Data for 28 OECD countries over the period 1990 to 2000 showed that the U.S. had the second highest coefficient, at 0.37. Only Mexico, at 0.49, was higher; it is the simplest measure of just how completely screwed up Mexico is and why its citizens, rather than revolting, are fleeing to the U.S (though they tried for political change in their recent election). But as the American coefficient rises, where will Americans run to?

Among European nations, the United Kingdom had the next highest level of inequality at 0.35, followed by Ireland and Italy, both at 0.33. Countries with the lowest levels  the greatest equality  were Denmark at 0.24 and Belgium, Finland, Germany, the Netherlands, Norway and Sweden at 0.25.

There are other useful ways to measure economic inequality that shed more light on this issue. One is the distance between the 10th, the 50th, and the 90th percentiles of the national income distribution. Greater distance between points in the distribution signifies greater overall inequality. In the U.S, the 10th percentile household earned about 39 percent of what the median household earned, while the 90th percentile household earned about 210 percent of the median. The American 10th percentile earner was further below the median than everywhere else except Mexico (28 percent). In other words, being poor in Mexico is much worse than being poor in the U.S. Thats why illegal immigrants risk so much to get here. Europeans mostly do better than us: Italy (44), Ireland (46), and the United Kingdom (47), and even better in Norway (57), Sweden (57), and the Netherlands (56). Being poor in Europe is better than being poor in the U.S.

As to the 90th percentile household, here the wealthy do very well at 210 percent of the median, with Mexico even worse at 328 percent, and the rich do slightly better in Luxembourg (215), and the United Kingdom (215), but much worse in Denmark (155), Slovakia (162), Finland (164) and the Netherlands (167).

Finally, the ratio of the 90th and 10th percentile earnings is another measure of income inequality, with Mexico at 11.55 having, by far, highest inequality. The United States (5.45) was next, well ahead of the United Kingdom (4.58), Australia (4.33), and Canada (4.13). The countries with the lowest “90-10″ gap were Norway (2.80), Denmark (2.85), Slovakia (2.88), Finland (2.90), and the Netherlands (2.98). The point to remember is that there are fine democracies with far more economic equality than we have.

An American myth is terrific upward economic mobility. The report presents data on the share of low-income families (where low-income was defined as earning less than half of the national median income) that escaped from low-income status over a three-year period in the mid-1990s. The U.S. had the lowest share of low-income workers that exit their low-income status from one year to the next (29.5 percent). In contrast, rates in several European countries are greater than 50 percent: Ireland (54.6), the Netherlands (55.7), the United Kingdom (58.8), and Denmark (60.4).

What about longer-term intergenerational mobility? Researchers have investigated the degree of correlation between fathers’ and sons’ incomes at different points in time. Intergenerational income coefficients quantify the economic advantage conferred by parents to their children. The higher the coefficient, the more likely are children born to poor parents remaining poor later in life. One study found the highest degree of economic mobility was in Germany (0.12), followed by Canada (0.18) and the United Kingdom (0.27). In contrast, intergenerational economic mobility was lowest, by a large margin, in the United States (0.45). Other studies also found a relatively high coefficient for the U.S., with high levels also in South Africa and the United Kingdom, but much lower levels in Canada, Finland, Germany, Norway, Denmark, and Sweden.

The report notes that What appear to be small differences in intergenerational income coefficients actually imply substantial differences in economic mobility. Take, for example, the case of a family with earnings that are half of the national average. Other factors held constant, if a country has a correlation coefficient for parent-child earnings of 0.20, we would expect that descendants of the poor family would reach the average national earnings in less than two generations, or about 25 to 50 years. In countries with a coefficient of 0.45, a typical level in the estimates for the United States (and, in some cases, for the United Kingdom), however, descendants of the poor family would not, on average, close the income gap with the average family for more than three generations, or about 75 to 100 years.

Its worth reading what the new report concluded:

The U.S. economic and social model is associated with substantial levels of social exclusion, including high levels of income inequality, high relative and absolute poverty rates, poor and unequal educational outcomes, poor health outcomes, and high rates of crime and incarceration.

At the same time, the available evidence provides little support for the view that U.S.-style labor-market flexibility dramatically improves labor-market outcomes. The data also appear to contradict the belief that greater economic mobility in the United States can somehow compensate for greater levels of inequality and “social exclusion.” Despite popular prejudices to the contrary, the U.S. economy consistently affords a lower level of economic mobility, both in the short-term (from one year to the next) and in the longer-term (across generations), than all the continental European countries for which data are available.

The hallmark of delusional prosperity is a widespread and stubborn belief that people who work hard will prosper because of so much economic opportunity. Yet data continually show that working- and middle-class Americans are not benefiting anywhere near the extent that wealthy Americans are. We may be a nation with great personal freedom, but we no longer have an economy in which macro-prosperity is shared. Like they say, the rich really are getting richer and everyone else is getting poorer. Fixing American democracy also means fixing our economy. Otherwise we are headed towards a class struggle of monumental proportions. Voting against establishment politicians in both major parties is a key way for Americans to revolt against the political system. There is no comparable way to rebel against our cruel economy, except to leave it.

The long-term trend in American economic inequality is clear. The government has measured family or household inequality since 1947. In the post-World War II era of 1947 to 1968, the coefficient decreased. In other words, in that period of prosperity, economic inequality decreased; there was real upward economic mobility. Not coincidentally, during that period the top marginal federal income tax rate was 90 or 70 percent. The coefficient dropped from 1947 to 1969. It remained stable from 1973 to 1980. Since around 1980, the coefficient has risen pretty consistently, under President Reagan, under Bush I, under Clinton, and under Bush II. The government uses pre-tax income, making the coefficient numerically higher than disposable income; it has risen from 0.35 in 1980 to 0.46 more recently. Experts believe that a coefficient of 0.5 likely precipitates social unrest. So the national mood of political discontent and disgust with the two-party duopoly is consistent with economic reality.

When will the Second American Revolution begin? How much more economic misery will it take? Maybe just a little more will bring the American population to the tipping point. We can hope.

Joel S. Hirschhorns new book is Delusional Democracy  Fixing the Republic Without Overthrowing the Government; he can be reached through www.delusionaldemocracy.com; he welcomes comments on his thinking.

Joel is a writer focusing on US politics, government, and culture. He was formerly a full professor at the University of Wisconsin, Madison, a senior staffer for the U.S. Congress (Office of Technology Assessment), head of an environmental consulting company, and Director of Environment, Energy and Natural Resources at the National Governors Association. His latest book is Delusional Democracy – Fixing the Republic Without Overthrowing the Government. He is a co-founder of Friends of the Article V Convention, its National Press Secretary, and writes regularly for many websites.

Glad Rachel (see letterfrom Florida) does not fall for splitting the working class by making out that public sector workers are the enemy. They are trying this in the UK – this will transfer many women from equal-pay jobs in the public sector to lower paid private sector ones. Workers and unemployed need to unite.

Players need to unite, too! There’s not much need for work, what with automation and globalization, but there’s lots of need for play, if humans are to be psychologically healthy — and if life has meaning.

Thank you for this post! My family lives in Florida where millionaire Rick Scott was able to buy his way into the governor’s mansion. He is now attacking the working class from the public sector (firefighters, police officers, teachers, and other public servants) as if they are the cause of our economic problems. The sad thing is that many other working class citizens (from moderate and low income families) are falling for the propaganda. Progressives need a loud voice so they can bring the truth to the working class. Thank you for your part in bringing the empirical evidence to the people!

Mr. Hirschhorn,
American Equality is a mindset, not a mathematical formula. The majority of poor in America have tremendous opportunity should they take advantage of the free education offered them K-12. Where the schools are incompetent is where we should focus change. Free will also comes to play — not everyone wants to be an MD, lawyer, dentist, stockbroker, etc. If the person nextdoor to me happens to be much wealthier than I am because they made personal decisions about their life and ambitions much different than mine, why is it any of your or my business? Why do you care? I say good for them. I hope your book sells so well you feel guilty about the profits :-).

I believe that the repeal of the “Fairness Doctrine” has been a major factor in giving wealth more control over the broadcast and print media that has permitted the public to become so easily manipulated. Even our “Public” Broadcasting Network as far more corporate dollar finger prints all over it. Our press is not free, it available only to the highest bidder.

We have verged on popular revolution over inequality at least twice since 1900: the early 20th century when the anger was defused (or at least diluted) by Teddy Roosevelts regulation of the corporate giants, and the early pre-war years of the Great Depression, was the anger was again defused or diluted by FDR social programs.

I suspect the next wave of serious anger will come with the collapse of the mountain of debt that has so far kept a large portion of the middle class from falling into the lower class. The big question is what will the next wave of anger bring?

This being America, which perpetually flirts with fascism and/or authoritarianism, and has been thoroughly propagandized regarding the wonders of capitalism, the alternatives appear to be:

1. Another wave of mild populism which gets mixed in with capitalism to largely preserve the status quo but with a bit more attention paid to the poor (as with Teddy and Franklin Roosevelt).

2. A pseudo-populist uprising that results in the installation of a vicious strong man of the Hitler/Mussolini bent, with the likely preservation of capitalism once the strong man is in place.

3. A new system which forces something resembling Scandinavian Socialism on the rich and powerful.

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Arts & Letters

Geonomics is …

a neologism for sharing “rent” or “social surplus” – the money we spend on the nature we use. When we buy land, such as the land beneath a home, we typically pay the wrong person – the homeowner. Instead, since land cost us nothing to make and is the common heri-tage of us all, rather than pay the owner, we should pay ourselves, our neighbors, our community. That is, we should all pay land dues to the public treasury, then our government would pay us land dividends from this collected revenue. It’s similar to the Alaska oil dividend, almost $2,000 last year. Indeed, the annual rental value of land, oil, all other natural resources, including the broadcast spectrum and other government-granted permits such as corporate charters, totals several trillion dollars each year. It’s so much that some could be spent on basic social services, the rest parceled out as a divi-dend, as Tom Paine suggested, and taxes (except any on natural rents) could be abolished, as Thomas Jeffer-son suggested. Were we sharing Earth by sharing her worth, territorial disputes would be fewer, less intense, and more resolvable.

a scientific look at how we divvy up the work and the wealth, how some of us end up with too much or too little effort or reward. That’s partly due to Ricardo’s Law of Rent, showing how wasteful use of Earth cuts wages. And it’s partly due to how a society’s elite runs government around like water boys, dishing out subsidies and tax breaks. While geonomists look political reality right in the eye, without blinking, conventional economists flinch. When Paul Volcker, ex-chief of the Federal Reserve, moved on to a cushy professorship at Princeton cum book contract, the crush of deadlines bore down. So Volcker asked a junior associate to help with the book. The guy refused, explaining that giving serious consideration to policy would ruin his academic career. The ex-Fed chief couldn’t believe it and asked the department chair if truly that were the case. That head honcho pondered the question then replied no, not if he only does it once. And economics was AKA political economy!

the study of the money we spend on the nature we use. When we pay that money to private owners, we reward both speculation and over-extraction. Robert Kiyosaki’s bestseller, Rich Dad’s Prophecy, says, “One of the reasons McDonald’s is such a rich company is not because it sells a lot of burgers but because it owns the land at some of the best intersections in the world. The main reason Kim and I invest in such properties is to own the land at the corner of the intersection. (p 200) My real estate advisor states that the rich either made their money in real estate or hold their money in real estate.” (p 141, via Greg Young) When government recovers the rents for natural advantages for everyone, it can save citizens millions. Ben Sevack, Montreal steel manufacturer, tells us (August 12) that Alberta, by leasing oil & gas fields, recovers enough revenue to be the only province in Canada to get by without a sales tax and to levy a flat provincial income tax. While running for re-election, provincial Premier Ralph Klein proposes to abolish their income tax and promises to eliminate medical insurance premiums and use resource revenue to pay for all medical expense for seniors. After all this planned tax-cutting and greater expense, they still expect a large budget surplus. Even places without oil and gas have high site values in their downtowns, and high values in their utility franchises. Recover the values of locations and privileges, displace the harmful taxes on sales, salaries, and structures, then use the revenue to fund basic government and pay residents a dividend, and you have geonomics in action.

what you do when you see economies as part of the ecosystem, following feedback loops and storing up energy. Surplus energy – fat or profit – enables us to produce and reproduce. To recycle society’s surplus, the commonwealth, geonomics would replace taxes with land dues (charged to users of sites and resources, in-cluding the EM spectrum, and extra to polluters), and replace subsidies with rent dividends to citizens (a la Alaska’s oil dividend). Without taxes and subsidies to distort them, prices become precise, reflect accurately our costs and values; then, motivated by no more than the bottom line, both producers and consumers make sustainable choices. While no place uses geonomics in its entirety, some places use parts of it, most notably a shift of the property tax off buildings, onto locations. Shifting the property tax drives efficient use of land, in-fills cities, improves the housing stock, makes homes affordable, engenders jobs and investment opportunities, lowers crime, raises civic participation, etc – overall it makes cities more livable. Geonomics – a way to share the bounty of nature and society – is something we can work for locally, globally, and in between.

shaped by reality. In the 1980′s, the Swedish government doubled its stock transfer tax. Tax receipts, however, rose only 15%, since traders simply fled to London exchanges. Fearing a further exodus, the Swedish government quickly rescinded the tax altogether. (The New York Times, April 20) That willingness to tax anything leads us astray. Pushing us astray is that unwillingness to pay what we owe: rent for land, our common heritage. Assuming land value is up for grabs, we speculate. We cap the property tax on both land and buildings and the rate at which assessments can go up; while real market values rise quicker, assessments can never catch up. Our stewards, the Bureau of Land Management, routinely sell and lease sites below market value, often to insiders, says the Government Accounting Office. Once we grasp that rent is ours to share, we’ll collect it all, rather than let it enrich a few, and quit taxing earnings, which do belong to the individual earner. That shift is geonomic policy.

about the money we spend on the nature we use. It flows torrentially yet invisibly, often submerged in the price of housing, food, fuel, and everything else. Flowing from the many to the few, natural rent distorts prices and rewards unjust and unsustainable choices. Redirected via dues and dividends to flow from each to all, “rent” payments would level the playing field and empower neighbors to shrink their workweek and expand their horizons. Modeled on nature’s feedback loops, earlier proposals to redirect rent found favor with Paine, Tolstoy, and Einstein. Wherever tried, to the degree tried, redirecting rent worked. One of today’s versions, the green tax shift, spreads out of Europe. Another, the Property Tax Shift, activists can win at the local level, building a world that works right for everyone.

an answer to a rarely asked question. If price is a reward for production, why do we pay for land, never produced by any of us? What is land price a reward for? Good behavior? How much money do we spend on the nature we use? Who gets it? What do they do with it? (If you answer all these correctly, you’re not a genius but a geoist.) The worth of Earth is enough that were we to collect and share it, we could abolish taxes on the goods we do produce. For example, San Francisco’s Redefining Progress has calculated that Cali-fornia could abolish all state and local taxes were it to collect the values of resources and of using na-ture as a dump. By exorcising the profit motive from depletion and pollution, rent collection could replace bossy regulation. Economies could self-regulate, as the rest of the eco-system does. See how big problems yield to big answers when we ask the right questions?

what you do when you see economies as part of the ecosystem, following feedback loops and storing up energy. Surplus energy – fat or profit – enables us to produce and reproduce. To recycle society’s surplus, the commonwealth, geonomics would replace taxes with land dues (charged to users of sites and resources, including the EM spectrum, and extra to polluters), and replace subsidies with rent dividends to citizens (a la Alaska’s oil dividend). Without taxes and subsidies to distort them, prices become precise, reflect accurately our costs and values; then, motivated by no more than the bottom line, both producers and consumers make sustainable choices. While no place uses geonomics in its entirety, some places use parts of it, most notably a shift of the property tax off buildings, onto locations. Shifting the property tax drives efficient use of land, in-fills cities, improves the housing stock, makes homes affordable, engenders jobs and investment opportunities, lowers crime, raises civic participation, etc – overall it makes cities more livable. Geonomics – a way to share the bounty of nature and society – is something we can work for locally, globally, and in between.

a manual. The world did not come without a way for people to prosper, and the planet to heal and stay well; that way is geonomics. Economies are part of the ecosystem. Both generate surpluses and follow self-regulating feedback loops. A cycle like the Law of Supply and Demand is one of the economy’s on/off loops. Our spending for land and resources – things that nobody made and everybody needs – constitutes our society’s surplus. Those profits without production (remember, nobody produced Earth) can become our commonwealth. To share it, we could pay land dues in to the public treasury (wouldn’t oil companies love that?) and get rent dividends back, a la Alaska’s oil dividend. Doing so let’s us axe taxes and jettison subsidies. Taxes and subsidies distort price (the DNA of exchange), violate quid pro quo by benefiting the well-connected more than anyone else, reinforce hierarchy of state over citizen, and are costly to administer (you don’t really need so much bureaucracy, do you?). Conversely, land dues motivate people to not waste sites, resources, and the ecosystem while rent dividends motivate people to not waste themselves. Receiving this income supplement – a Citizens Dividend – people can invest in their favorite technology or outgrow being “economan” and shrink their overbearing workweek in order to enjoy more time with family, friends, community, and nature. Then in all that free time, maybe we could figure out just what we are here for.

a new policy from a new perspective. Once your worldview shifts — so that vacant city lots are no longer invisible — then epiphany. “Of course! Why didn’t I see it before?” Once you do see the emptiness and what damage it does, how can you ever go back to the old paradigm?